EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021; filed July 29, 2021. Financial statements are unaudited and prepared under U.S. GAAP. EMCOR provides electrical and mechanical construction, building, and industrial services through approximately 85 operating subsidiaries in the United States and United Kingdom.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.438 billion | $2.014 billion | $4.742 billion | $4.314 billion |
| Gross profit | $376.3 million | $315.3 million | $717.4 million | $648.3 million |
| Gross margin | 15.4% | 15.7% | 15.1% | 15.0% |
| Operating income (loss) | $133.4 million | $(122.6) million | $250.4 million | $(16.6) million |
| Operating margin | 5.5% | (6.1)% | 5.3% | (0.4)% |
| Net income (loss) attributable to EMCOR | $97.4 million | $(83.7) million | $182.1 million | $(8.0) million |
| Diluted EPS | $1.78 | $(1.52) | $3.32 | $(0.14) |
Q2 revenue increased 21.0% year over year, while six-month revenue increased 9.9%. Management stated that Q2 2021 set company records for second-quarter revenue, gross profit, operating income, net income, and diluted EPS. Revenue increased in all reportable segments except U.S. industrial services. The prior-year periods were heavily affected by COVID-19-related project delays, facility access restrictions, reduced service activity, and oil-and-gas market weakness.
Cash flow, liquidity, debt, and capital allocation
- Net cash used in operating activities was $7.0 million in the first six months of 2021, compared with $276.7 million provided in the prior-year period. The decline primarily reflected working-capital investment from revenue growth, higher tax payments, and payment of deferred U.K. value-added taxes.
- Net cash used in investing activities was $70.9 million, including $55.8 million for acquisitions and $16.7 million of capital expenditures.
- Net cash used in financing activities was $157.1 million, including $138.0 million of share repurchases and $14.2 million of dividends.
- Cash, cash equivalents, and restricted cash declined $233.8 million to $669.8 million at June 30, 2021, from $903.6 million at December 31, 2020.
- Total debt was $276.2 million, including a $270.6 million term loan and finance lease liabilities. No direct borrowings were outstanding under the $1.3 billion revolving facility, although $71.3 million of letters of credit reduced availability.
- The credit agreement expires March 2, 2025. The applicable interest rate was 1.10% at June 30, 2021, and the company was in compliance with its covenants.
- EMCOR repurchased approximately 1.1 million shares for $138.0 million during the first six months and had approximately $107.9 million of remaining repurchase authorization at June 30, 2021. The quarterly dividend was $0.13 per share.
Material changes versus the prior comparable period
- The Q2 2020 operating loss included a $232.8 million non-cash impairment charge, consisting primarily of a $225.5 million goodwill impairment in U.S. industrial services and $7.3 million of identifiable intangible and other long-lived asset impairments. No comparable impairment was recorded in 2021.
- Excluding the prior-year impairment, Q2 and six-month 2021 operating income increased by $23.2 million and $34.3 million, respectively, reflecting improved operating performance in most segments.
- U.S. mechanical construction revenue increased to $958.7 million in Q2 and $1.863 billion year to date, supported by commercial, e-commerce, data, fire protection, and healthcare activity.
- U.S. building services revenue increased to $624.5 million in Q2 and $1.206 billion year to date, supported by resumed customer activity, maintenance contracts, indoor-air-quality services, and acquisitions.
- U.S. industrial services revenue declined to $235.2 million in Q2 and $470.5 million year to date. The segment reported an operating loss of $0.2 million in Q2 and $2.7 million year to date, including a $4.1 million increase in credit-loss provisions associated with a specific customer bankruptcy.
- Remaining performance obligations increased to $5.107 billion at June 30, 2021, from $4.595 billion at both December 31, 2020 and June 30, 2020. Approximately $4.303 billion was expected to be recognized within one year.
- During the first half of 2021, EMCOR acquired three companies for total consideration of approximately $57.0 million. A further acquisition for an immaterial amount occurred in July 2021.
Guidance, outlook, risks, and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management was cautiously optimistic about its markets but continued to identify uncertainty related to COVID-19, including potential virus variants, employee illness or quarantine requirements, customer access restrictions, project delays or cancellations, supply-chain disruption, customer credit quality, and the effectiveness of vaccines and recovery efforts.
- U.S. industrial services remains exposed to lower oil-and-gas demand, reduced customer capital spending, facility closures, project deferrals, and cost-cutting measures.
- Accounts receivable increased to $2.103 billion, and the allowance for credit losses increased to $22.5 million from $18.0 million at year-end 2020. Management identified a specific industrial-services receivable as the principal driver of the increase.
- Fixed-price contracts expose margins to increases in copper, steel, energy, labor, and other input costs. The filing states that price increases may not be fully recoverable.
- Surety bonds supported approximately $1.4 billion of estimated exposure on bonded projects, or about 27% of remaining performance obligations. Reduced surety capacity could limit bidding activity or require more expensive collateral.
- Self-insured and captive-insurance liabilities totaled approximately $306.3 million on an undiscounted basis at June 30, 2021, partly offset by anticipated insurance recoveries. A 10% increase in estimated insurance liabilities would have produced approximately $17.6 million of additional expense for the six months ended June 30, 2021.
- Goodwill impairment testing remains sensitive to market conditions and valuation assumptions, particularly for U.S. industrial services. The filing states that adverse changes could result in future impairment charges.
- Legal proceedings, government audits, investigations, guarantees, and insurance claims are described as not expected to have a material impact based on currently available information, although unfavorable outcomes remain possible.
- Interest-rate exposure is primarily tied to variable-rate debt; a 100-basis-point rate increase was estimated to increase after-tax interest expense by approximately $2.0 million over the next twelve months.
Investor verification points
- Verify whether the recovery in construction and building services demand is durable and distinguish organic growth from acquisition-related growth.
- Monitor U.S. industrial services revenue, margins, customer concentration, credit losses, and the potential for renewed goodwill impairment.
- Reconcile strong earnings with negative operating cash flow and track receivables, contract assets, contract liabilities, taxes, and working-capital conversion.
- Assess liquidity after share repurchases, dividends, acquisitions, capital expenditures, letters of credit, and term-loan repayments.
- Review the $5.107 billion remaining performance obligation balance for cancellation provisions, timing, margin quality, and exposure to change orders or claims.
- Evaluate sensitivity to labor, commodity, fuel, inflation, interest-rate, foreign-exchange, COVID-19, litigation, insurance, and surety-bond risks.